The cryptocurrency ecosystem has been expanding exponentially, bringing together a simple world of currencies with a modern-day blockchain philosophy. A spin-off from the late 1980’s initial public offering (IPO) instrument for the stock market, the initial coin offering (ICO) has taken the space by storm.
Already a prolific means of investment, the ICO spectrum has marked a new wave of asset classes such as the ERC-20 token, utility tokens built on the Ethereum blockchain that offer a purpose, not a monetary value asset. These often represent a business or an organization or project.
During an ICO, a business will create a specific token that can be bought with other cryptocurrencies, enabling the user to capitalize straight away on whichever new project they choose, and from that, the capital is then spread back into the project.
Using an ICO eliminates the need for venture capital investments and establishes a direct relationship between the user and the project. In the case of most serious projects, they even hold a private sale and receive traditional seed funding prior to the ICO.
What is tokenomics?
Tokenomics is defined as the first and most straightforward self-funding ecosystem for projects within the blockchain space.
The ICO frenzy has been catching the attention of the mainstream media and the general public and has taken a giant leap in the scale of obtaining the funding for a project in the blockchain space. The most significant token event to date is the Telegram Open Network (TON) ICO, aiming to raise an enormous USD 2.5 billion over the course of three fundraising rounds.
Goldman Sachs issued a report that token sales have blacked out venture capital as the primary source of funding for early-stage tech companies.
Functionality of Tokens
Financial regulators have been relatively permissive. They have opted for a less restrictive form of self-governance, watching out for fraudulent behavior and flagrant violations securities laws.
The SEC is set to crack down, looking at the spectrum as a whole. For now, if it is a security, a token will have to register with the SEC; if it is a utility token, then the SEC won’t touch it.
If a token does not qualify as a security and operates under the full compliance of SEC regulations, a token has a tendency to be looked at as a utility token, a token designed through function. A token understood as a security is a financial instrument that mirrors the traditional securities found within the economy.
The tokenomics model is to correlate a monetary share in a company based on a digital token, where the investor hopes to gain capital based on the company’s performance. Adopting the best standards from the relevant regulatory body, it is not uncommon for ICOs to ignore them.
The ERC-20 token has been the industry standard for ICOs to use, although this does not mean it is the only token to provide these kinds of functions. The ethos in the market space is that cryptocurrencies symbolize programmable money, the ability for a token to do whatever is programmed to do while continuing to do it without fail for as long as the network is active.
The crypto economy has been built on the industry backbone of Bitcoin as a means of cutting out the third party, transferring value, creating and implementing the decentralization revolution. As an instrument of self-funding, the final definition of tokenomics is open; it is a set of all economic activity that has gradually gained traction through the creation of tokens using the ICO model to raise funds.